Chapter 12
Tax Considerations In
Estate Administration
Learning Objectives
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Understand what responsibility the personal representative
has concerning the decedent’s taxes
Understand how to complete the decedent’s final income
tax return
Learn how to complete the estate’s federal tax return
Learn how the decedent’s estate is valued
Learn what may be done legally to minimize the estate’s tax
burden
Learn how recent changes in federal tax laws affect estate
administration
Learn a few post-mortem estate planning techniques
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
Who Is Responsible For The Estate’s IRS
Obligations?
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The executor or administrator is responsible
If the correct forms aren’t timely filed, the
representative will be personally liable for all
penalties and back interest
But—there is IRS Publication 559!
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Pub. 559 details what forms need to be filed on the
decedent’s behalf
Pub. 559 provides sample forms
Pub. 559 has instructions on completing the forms
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
Important IRS Forms To Be Filed First
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Form 56: Notice Concerning Fiduciary
Relationship
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identifies the decedent and the personal representative
not required by the IRS, but filing this form makes
things easier; insures IRS knows who to contact
Form SS-4: Application for Employer
Identification Number
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the estate, as a non-human entity, needs a tax ID number
the tax ID number needs to be used on all later IRS
documents and correspondence
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
The Decedent’s Final Income Tax Return
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Form 1040 is filed by the personal representative
The 1040 form for a decedent has two distinguishing
features
 It should be marked “final return”
 the tax year should only include the time the
decedent was alive
If a refund is due, file a Form 1310
If the estate pays the decedent’s medical expenses,
they may be deducted on the decedent’s income tax
return
Remember—state and local tax returns need to be
filed also (where there are state taxes)
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
The Estate’s Federal Income Tax Return
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Income of the decedent accrued during life but
not paid before death flows to the estate
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So, the estate must file a tax return to account
for that income
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IRS Form 1041
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
The Estate Tax Return
Federal and state estate tax returns must be filed
IRS Form 706 must be filed within nine months of
the decedent’s death
Five parts of Form 706
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1)
2)
3)
4)
5)
Information on decedent and personal representative
Tax computation, which requires 19 schedules to be
completed
Alternative valuation election
“General information,” including decedent’s occupation,
marital status, etc.
“Recapitulation,” a summary of the totals on the 19
schedules
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
How Ugly Is The Gross Estate?
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The gross estate is the value of the property and
interest of the decedent, at death, including jointly
held property, pensions, and life insurance
Usually fair market value (FMV) is used to value the
estate’s assets
But…the representative can elect to value the property
six month after decedent’s death (alternate valuation)
The alternate valuation must be used for all property if
chosen
This could lead to a reduction in value if some of the
properties’ value are falling
The taxable estate (adjusted gross estate) is calculated
after exemptions and deduction offset the gross estate
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
Form 706
Schedules Relating to Assets
Schedules Relating to
Deductions
A: Real Estate
A-1: Real Estate Used in Farming
or Closely Held Business
B: Stocks and Bonds
C: Mortgages, Notes and Cash
D: Insurance on Decedent’s Life
E: Jointly Held Property
F: Other Miscellaneous Property
G: Transfers During Decedent’s
Life
H: Powers of Appointment
I: Annuities
Wills, Trusts, and Estates Administration, 3e
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K: Debts of the Decedent, and
Mortgages and Liens
L: Net Losses During
Administration and Expenses
Incurred in Administering
Property Not Subject to Claims
M: Bequests and the like to
Surviving Spouse
N: Qualified ESOP Sales (this
schedule is repealed!)
O: Charitable, Public, and Similar
Gifts and Bequests
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
Form 706 (continued)
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Schedules Relating to Credits
Credits directly reduce the amount of taxes that
are due by the decedent’s estate
P: Credit for Foreign Death Taxes
Q: Credit for Tax on Prior Transfers repealed
– do not use
R: Generation-Skipping Transfer Tax
U: Qualified Conservation Easement Exclusion
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
Unified Tax Credit
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Formerly, persons were entitled to a credit of $600,000
against their estate’s value, or 1.2 million for spouses, but it
included gift and estate credits together
That changed in 2001 when federal tax laws were changed
Under the present law, the gift and estate tax schedules are
separate
The new law’s tax credit increases each year until January
1, 2010 when it becomes unlimited and someone can die
without any estate tax. But…
January 1, 2011 the old unified credit system is scheduled to
go into effect again and if you die then your credit is only $1
million each.
As of December 2010 Congress had not fixed this
predicament
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
Estate Valuation Exemptions Under The
EGTRRA of 2001
Exclusion Amounts for Estate Transfers
2001
$ 675,000
2002-2003
$1,000,000
2004-2005
$1,500,000
2006-2008
$2,000,000
2009
$3,500,000
2010
the law is repealed
2011
$1,000,000
If EGTRRA isn’t made permanent, living past
December 31, 2010 could be costly
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
Top Gift and Estate Tax Rates for Years 2003
Through 2011
Year
Bracket
2003
2004
2005
2006
2007
2008
2009
2010
2011
49%
48%
47%
46%
45%
45%
45%
35% (Gift Tax Only)
55%
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
The Paralegal And Estate Valuation
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Paralegals working in this area should have or learn
accounting, computation, and considerable
organization skills
Learning how to maneuver through IRS Form 706 and
its 19 schedules is paramount
Learning how to organize and complete the various
federal and state tax forms is also critical
Working with accountants, appraisers, tax experts, and
financial institutions (not to mention the personal
representative) is standard in this area of paralegal
practice
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© 2011, 2007, 2001 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.